Mario Draghi, the head of the European Central Bank, has expressed serious concerns about a proposed new law that seeks to prevent banks from selling problem loans to so-called vulture funds without borrowers' permission.
Mr Draghi has said Sinn Féin’s No Consent, No Sale Bill “could undermine financial stability”.
He was asked last month by the Oireachtas Committee on Finance to give an opinion on the Bill.
The Bill, brought forward by Pearse Doherty, recently received parliamentary backing after Fianna Fáil supported it.
In an opinion letter sent to TDs who sit on the finance committee, Mr Draghi warned the law could also reduce economic capacity and have a significant impact on mortgage pricing and availability.
Mr Doherty has said that the proposed law “is in no way a get-out-of-jail-free card for borrowers” but instead would protect vulnerable homeowners.
No impact assessment
In his opinion, Mr Draghi said the draft law has not been subjected to a thorough impact assessment. He said the ECB has concerns that the draft law would have "significant adverse effects on Irish credit institutions' ability to participate in Eurosystem monetary policy operations, as well as on their funding situation and capacity to properly manage their balance sheets".
“In turn, this is likely to result in additional costs being passed on to other borrowers. It could also result in a significant impact on mortgage pricing and availability, and even an increase in [non-performing loans], all of which are likely to impact financial stability, Irish taxpayers and ultimately the Irish economy.”
Mr Draghi said that by depriving banks and credit institutions of tools to work out their non-performing loans, new costs would be generated that would probably be passed on to other borrowers.
“This could result in a significant impact on mortgage pricing and availability, further increasing interest rates charged to borrowers in Ireland, including holders of variable rate mortgages, and potentially leading to higher levels of non- performing loans.”
Costs to banking
Enacting the Bill would also entail financial costs for the banking sector, he said.
“Given the scope of the draft law and the importance of mortgage portfolios in total credit institution assets, these factors would have a negative impact on the profitability, capitalisation and future lending capacity of the credit institutions affected, and ultimately may have implications for financial stability.”
“Combined with the potential impact of a shift away from stable, relatively cheap, central bank funding towards more volatile wholesale markets, the draft law could undermine financial stability.”
He also said banks may respond to the law by “unduly tightening lending conditions, in particular by charging higher interest rates and by decreasing lending volumes with a potentially negative compositional effect in terms of credit allocation. This could reduce economic capacity in Ireland.”
Speaking about the proposed law in January, Mr Doherty said it was necessary to protect homeowners.
“It is clear that this Bill is in no way a get-out-of-jail-free card for borrowers,” he said. “In no way does it mean a borrower can simply not pay and expect to stay in his or her home.”
